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Court of Appeal confirms objective element of good faith test under s.172 Companies Act
On 9 June 2025, the Court of Appeal handed down judgment in Saxon Woods Investments Limited v Francesco Costa [2025] EWCA Civ 708, providing clarification of the good faith test and the duties of directors under s. 172 of the Companies Act 2006 ("CA 2006").
In an unanimous judgment, Lord Justices' Edis, Snowden and Zacaroli held that Stephenson Harwood's client, Saxon Woods, which had suffered unfair prejudice at the hands of Mr Costa, was entitled to the relief it sought at first instance, namely an unconditional buy-out order.
In dismissing Mr Costa's appeal, the panel voiced the following helpful reminders to directors and corporate counsel, alike:
- The question of whether a director has acted in good faith involves not only the subjective assessment outlined in Regentcrest plc (in liquidation) v. Cohen [2001] 2 BCLC 80; but also, crucially, an assessment of whether their conduct, in reliance on their belief, was objectively honest.
- Deliberately deceiving the board of a company must, either always or almost always, be inconsistent with a director’s duty under s. 172.
- A remedy under s. 996 can not only seek to put right past unfair prejudice but can also seek to cure it for the future, and that might include relief in the form of a buy-out order.
Facts
Saxon Woods is a minority shareholder in Spring Media Investments Limited (the "Company"). Mr Costa is a high-net-worth individual who is a substantial indirect shareholder in the Company. He is also chairman of the board of directors of the Company, who exercises de facto control. The Company's shareholders' agreement (the "SHA") required the Company and shareholders to work together in good faith towards an exit by no later than 31 December 2019. Should an exit not be achieved by that date, the Company was obliged to instruct an investment bank to "cause an exit".
As matters turned out, no such exit ever took place. Saxon Woods alleged that Mr Costa caused the Company to breach the SHA by failing to work towards the exit in good faith. The trial judge confirmed that Saxon Woods had indeed suffered unfair prejudice because the Company, under Mr Costa's stewardship, failed to give good faith consideration to expressions of interest from third parties in transactions that would have constituted an exit under the SHA. However, the trial judge found that Mr Costa had not breached his fiduciary duty under s. 172 CA 2006 and declined to make an unconditional buy-out order as, in his words; "[I] have concluded that the Petitioner has suffered unfair treatment, but I do not know whether he has in fact suffered any material prejudice or not. In these circumstances I think it would be rather odd to make an order that started off by assuming that prejudice had been found and granting a buy-out remedy consistent with that finding".1
Both parties appealed.
The core meaning of a requirement of good faith is that it requires honesty
At first instance, the trial judge found that Mr Costa had deliberately misled the board and, despite assuming exclusive control of the exit process, concealed that he was doing nothing to achieve an exit before 31 December 2019, and in fact was doing as much as he could to prevent it.
"[Mr Costa] had ensured that it was him and him alone who controlled the Company's actions, such that he was not merely in a position to recommend a course of action, but to ensure that that course of action was in fact pursued".2
Despite these factual findings, the trial judge held that Mr Costa had not breached his director's duties under s. 172 and s. 174 CA 2006. Applying the test established in Regentcrest, 3 the trial judge approached the assessment of the good faith obligation to promote the success of the company as a whole, subjectively, finding that the question for him to resolve was whether “the director honestly believed that his act or omission was in the interests of the company". On this basis, he concluded that Mr Costa "did sincerely believe that he was acting in the best interest of the Company and its investors" and that accordingly, he had not acted in breach of duty.4
The Court of Appeal took issue with this finding for two reasons. First, it would follow that on the judge’s approach, a director of a company could do any act provided that they (subjectively) considered that it was the course most likely to promote the success of the company, and they would thus not be acting in breach of duty if they were deliberately to mislead the company.5 This could not be right.
Secondly, in focussing on the subjective state of Mr Costa’s mind alone, the trial judge had failed to appreciate that at the time Regentcrest was decided, the civil law had not been definitively determined and the criminal law was labouring under an erroneous view mandated by R v. Ghosh [1982] QB 1053. The good faith requirement requires honesty, and this was especially so in respect of the post-2006 duty under s. 172 which the Court of Appeal described as "the codification of a duty of a director of a company which has always been regarded as a paradigm example of a fiduciary duty".6
The Court of Appeal held that the relevant test as to whether a person has acted honestly or dishonestly requires an objective assessment of the conduct of the relevant person, in the light of the facts as they knew or believed them to be when they embarked on their course of conduct;7 see Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2017] UKSC 67at §74. In failing to apply the test in Ivey, the trial judge had not addressed the question of whether Mr Costa’s conduct in reliance on his belief was, objectively, honest by the standards of ordinary decent people.
Given the factual findings regarding Mr Costa's conduct, the Court of Appeal held that the trial judge ought to have found that Mr Costa had behaved dishonestly in a manner which he knew or ought to have known was contrary to the Company's obligations under the SHA,8 and therefore, in breach of his fiduciary duty under s. 172 CA 2006.9 There was no need, in light of this finding, to go on to consider whether the trial judge's conclusion in relation to the duty under s.174 CA 2006 was correct.
Unfair prejudice
As to the question of relief, the Court of Appeal held that Mr Costa’s conduct in causing the Company to breach its obligations under the SHA was unfairly prejudicial irrespective of whether an exit would have been achieved, given Mr Costa's conduct entirely deprived Saxon Woods of the opportunity to try to achieve one.10 It ordered that Mr Costa buy Saxon Wood’s shares on a non-discounted and open market basis as at 31 December 2019, with such value to be determined by the Court on hearing appropriate expert evidence.
Importantly, the appeal court clarified that prejudice, for the purposes of s. 994 CA 2006, does not need to be financial in character, and if unfair prejudice is established, then s. 996 plainly gives the court the power to grant such relief as it thinks fit in respect of the matters complained of.11
Conclusion
This judgment provides welcome clarification of the subjective and objective tests to be applied when considering whether a director has acted in breach of their fiduciary and statutory duty under s. 172 CA 2006 as well as a salutary reminder that directors of private companies must always act honestly and in the best interest of the company and all of its members. Unilateral decisions or intentional attempts to deceive or mislead the board are a breach of duty, regardless of reasoning.
Unfair prejudice claims can be complex, costly and lengthy, and parties should seek expert legal advice before taking steps to pursue or defend them. Stephenson Harwood is excellently positioned to advise on these matters.
1 Saxon Woods Investments Limited v Francesco Costa & Ors [2024] EWHC 1056 (Ch) at §56.
2 Saxon Woods Investments Limited v Francesco Costa & Ors [2024] EWHC 387 (Ch) at §208.
3 Regentcrest plc (in liquidation) v. Cohen [2001] 2 BCLC 80 at §120.
4 Saxon Woods Investments Limited v Francesco Costa & Ors [2024] EWHC 387 (Ch) at §208.
5 See at §116 and 117.
6 See at §108.
7 See at §110.
8 I.e. to work together in good faith towards an exit and to give good faith consideration to any opportunity to exit.
9 See at §123.
10 See at §94.
11 See at §90.